Burrito Bonds, Say What?
Are Mini Bonds worth the risk?
Shouting out to me on my lunch break was a bright and colourful sign from TexMex company Chilango it said — “Burrito Bond 2.0 — Capital At Risk”.
I was immediately curious…..
At first I thought it might just be an odd lunch marketing deal aimed at financial professionals. However it seems I am out of touch, a burrito bond is in fact a way of investors directly lending capital to companies. It is also known as a mini bond.
Bonds are one of the most recognised financial instruments. They are low risk and often considered portfolio stabilisers. Bonds are issued by companies or governments who would like to raise capital to fund new projects, expand into new locations etc. By providing a company with capital, an investor will in return receive interest payments on set intervals. When the bond matures, the investor will receive the original face value amount in addition to the interest payments they received.
A mini bond on the other hand is essentially a bond on steroids. It may even be too generous to refer to it as a financial instrument. The mini bond has more characteristics in common with crowdfunding than a traditional bond. With a mini bond, investors receive company related goodies based on the amount they invested as well as interest payments. In the case of the Burrito bond, a generous annual interest rate of 8%.
For an investment of £500 in a 5Y Burrito bond. An investor will have received £700 on maturity and two free burritos. Sounds like an incredible deal right?
Of course there is a catch.
Mini bonds do not offer an investor the same stability as traditional bonds hence why it’s “capital at risk”. A mini bond is illiquid, you cannot re-sell the bond on the secondary market. An investor would be unable to act on publicly available information like press releases or quarterly results. Many analysts have commented that by investing in a mini bond you are getting all the risks of the equity market but limited reward.
You might also be wondering why a company would offer a mini bond over traditional bonds. For many small to medium sized corporations issuing a bond via an investment bank can be an extremely lengthy and costly process. Using a mini bond can be an efficient way to gain funding with minimal effort or regulatory repercussions. Companies with loyal customer bases like BrewDog, Hotel Chocolat & Chilango have found this a successful form of funding.
It feels as though with mini bonds, the majority of advantages lay with the company issuing the bond. The decision must come down to the investor and mini-bonds are definitely marketed towards super-fans of the company. The investors must have faith in the companies long term vision because once your in, there is no way back out.